(Reuters) - A lawyer for former Xerox executive Barry Romeril urged the 2nd U.S. Court of Appeals on Friday to lift what she called a "gag order" included in Romeril's settlement with the U.S. Securities and Exchange Commission, arguing the provision was unconstitutional.

Margaret Little of the New Civil Liberties Alliance told a three-judge panel that the SEC policy of letting defendants settle without admitting the agency's allegations -- but only if they agree to not deny them or face having the case reopened -- violates Romeril's First Amendment rights and the rights of the 98% of defendants who settle SEC civil cases.

"That is profoundly dangerous because we do not know what goes on in those proceedings," she said. "The person most knowledgeable about those claims is forced to be silent about them forever."

The judges questioned the idea that the so-called gag rule is unconstitutional, with Circuit Court Judge Denny Chin asking why Romeril should "have it both ways" by invalidating only the gag provision and not the rest of the deal.

"Mr. Romeril could have chosen not to settle if he felt that strongly about it," Chin replied.

Romeril, Xerox's former CFO, was one of six executives who settled with the agency in 2003. The SEC had alleged they inflated the company's earnings by $1.4 billion between 1997 and 2001. Romeril agreed to pay more than $5 million in penalties and disgorgement and be permanently barred from serving as an officer or director of a publicly traded company.

On Friday, Little argued that courts have overturned other agreements in which the government attached unconstitutional conditions, prompting U.S. Circuit Judge Debra Livingston to reply that those cases dealt with government benefits.

"Settlements benefit the public, they may benefit the settling party, but it's not strictly speaking a government benefit," she said.

Little responded that "any American who is being prosecuted by a federal agency" should have the option to settle without unconstitutional strings.

U.S. Circuit Judge Joseph Bianco asked on Friday why Romeril had waited 16 years to make his challenge. Little replied that Romeril only realized his settlement's constitutional shortcomings after reading her op-ed article about the issue in 2018.

The following year, Romeril asked U.S. District Judge Denise Cote in Manhattan to cut the gag provision out of his consent judgment, arguing she had no jurisdiction to approve it because it was unconstitutional. The judge rejected that request, calling the delay unreasonable and his constitutional argument unsupported.

SEC attorney Jeffrey Berger urged the panel on Friday to uphold the ruling. The procedural mechanism Romeril had invoked only allows judgments to be voided for jurisdictional errors or due process violations, he said, citing the U.S. Supreme Court's 2010 ruling in United Student Aid Funds Inc v. Espinosa.

Romeril's argument turned on neither of these but rather a purported error of law, Berger suggested.

He confirmed that the SEC requires settling defendants who don't admit to allegations not to deny them but argued Romeril could have taken the case to trial.

"There is absolutely no case out there that suggests you somehow have a right to settle," he said.

The case is SEC v. Romeril, 2nd U.S. Circuit Court of Appeals, No. 19-4197.

For Romeril: Margaret Little of New Civil Liberties Alliance

For the SEC: Jeffrey Berger